“The case for change has not been shared in detail, and therefore firms that will be involved in delivering the replacement project remain unconvinced the case for change is justified,” the report said.
“The basis for estimates of the value of efficiency benefits [that] the replacement project will deliver have not been shared in detail for verification and challenge.
“Insufficient information exists to estimate the effort and cost to be borne by financial market flows to deliver to the requirements of the replacement project.
“No principles have been established to describe how any created value will be shared and ultimately be delivered to issuers and investors.”
Combative manner
A properly functioning board of directors would have listened to these criticisms, considered them and then reacted in a meaningful and thoughtful way.
People with a natural curiosity about technological change would surely have questioned each other about the governance of the project given these fundamental criticisms.
But it is understood the board reacted in a combative manner. There were reports at the time that a senior member of the ASX board called the head of Deloitte in Australia and criticized the firm for publishing the report.
Other directors were allegedly instructed to send messages to their networks that the Deloitte report was misleading or motivated by vested interests threatened by a blockchain-based distributed ledger technology.
It is true the report was partially funded by the country’s two biggest share registries – Computershare and Link Administration Holdings – which were potentially threatened by the ASX’s promise of a single source of truth for the real-time settlement of all share transactions.
The board’s reaction was itself a red flag, as was the reaction of the ASX’s deputy chief executive and then head of the CHESS replacement project, Peter Hiom.
Hiom slammed the share registry companies for resisting technological change and accused Deloitte of being incapable of producing an independent report.
He says the share registry companies operated “ancient” technology, and did not want to bear the cost of updating their technology to meet the new technology standards being implemented by the ASX.
Hiom, who left the ASX in May 2021, said Deloitte’s shareholding in a potential clearing and settlement competitor to the ASX called SETL meant that its report could not be regarded as independent.
With the benefit of hindsight, Hiom, then ASX chairman Rick Holliday-Smith, former CEO Dominic Stevens and members of the ASX board should have read the conclusions of the Deloitte report and taken action.
The report concluded that “the design of replacement project governance functions has been done with the intent to avoid reasonable challenge to the committed course of action”.
Chanticleer spoke to technology experts who agreed with the Deloitte report finding that there was no business plan for the CHESS replacement project.
As the equities market operator, ASX is in the business of running a stock exchange. It is not a systems integrator.
But in embarking on the CHESS replacement it set itself up as a systems integrator capable of building a replacement for a mission-critical piece of financial market infrastructure.
Its lack of experience as a systems integrator led to a number of fatal errors.
His first mistake, as outlined by the Deloitte report, was to not undertake a business case that included the objectives and planning for future expansion of the equities market. This should have involved laying out all the non-functional requirements, including security, integration, resilience, performance and scalability.
But there wasn’t a collective agreement at the beginning of the project about what the non-functional requirements were.
Not one system
The Accenture report commissioned by new CEO Helen Lofthouse and released last month, along with the decision to pause the project and write off $250 million, said the software for some of these requirements was woefully incomplete. For example, the performance and scalability aspects of the software were only 27 percent complete.
The second significant mistake was to attempt to replicate all the existing features of CHESS in the new system. This left open the high probability that the project would blow out in scope and cost.
CHESS is not one system. It is a multiple level of different systems. These include a clearing system, a subregister (which covers share ownership), a settlement system (which covers payments and changes in share ownership titles), a corporate actions layer, a customer relationship management function, invoicing and the Holder Identification Number (which allows individual ownership of shares).
Not only is CHESS multilayered, it includes net broker obligations, which allow the netting of share transaction liabilities between brokers each day.
ASX will never find an off-the-shelf solution for this. But deciding to replicate it all in a new system was a serious mistake.
A third mistake was to build the system in an iterative manner. This probably sounded good at the time because it meant the system could respond to changing conditions.
But it is ridiculous that the ASX only contemplated higher-than-normal share trading volumes after the disruption caused by the COVID-19 pandemic, when share trading volumes surged to three times the normal level.
No one designing the system or preparing the business case had contemplated the share volumes commonly found in other markets.
A fourth mistake that must be brought home to the management of the ASX was the turnover of people, including highly technically skilled staff leaving.
Some will argue that the CHESS replacement was a good idea executed badly, which does not make it a bad idea.
But that view is similar to the groupthink which has inhabited the ASX board for years.
This week’s ASX Business Committee meeting revealed that the former head of the project, Tim Hogben, still believes much can be salvaged from the software that has been built.
But new project director Tim Whiteley is keeping an open mind.
The wrong mindset inhabiting ASX’s ranks was evident from the comments made at the committee meeting by chief risk officer Hamish Treleaven, who referred to two positive EY assurance reports as evidence that the CHESS project was well run.
In fact, these reports are just further proof that ASX needs to get a fiercely independent review of the project by an outside expert. A good start would be Michael Devlin, managing partner at Certus3.
His firm assists organizations to diagnose, reform and provide ongoing management support for “challenging programs of work”.